7.2 Goals of a Compensation Package

Most of us, no matter how much we like our jobs, would not do them without a compensation package. When we think of compensation, often we think of only our pay cheque, but compensation in terms of HRM is much broader.

This is the concept of Total Compensation Package or sometimes known as Total Rewards. A compensation package can include wages or salary, perks, amenities, health-care benefits, and other benefits such as retirement plans that is offered by the company in exchange for work performed.

When Human Resources departments determine compensation for its employees, it wants to meet internal and external equity.

Internal equity is a perceived equity among different jobs within a company.  In other words, jobs that are similar should have similar value, and receive similar pay. Jobs that are paid more are based on higher skills, knowledge, abilities, experience, and education. In turn, jobs that are paid less, have less value to the company because they are lower skilled, require less education and experience.

External equity relies on paying employees that is perceived to be fair based on what they market is paying. The company compares their own pay to what other similar companies are paying their employees.

A compensation package should be positive enough to attract the best people for the job. An organization that does not pay as well as others within the same industry will likely not be able to attract the best candidates, resulting in poorer overall company performance. Once the best employees and talent come to work for your organization, companies want the compensation to be competitive enough to motivate people to stay with the organization. Although compensation packages are not the only thing that motivates people, compensation is a key component. Compensation can be used to improve morale, motivation, and satisfaction among employees. If employees are not satisfied, this can result not only in higher turnover but also in poor quality of work for those employees who do stay. A proper compensation plan can also increase loyalty in the organization. Compensation packages must adhere to the laws that applies to federal, provincial, and territorial governments. Some of these include paying minimum wage, pay for overtime worked, and vacation pay.

Pay systems can also be used to reward individual or team performance and encourage employees to work at their own peak performance. With an appropriate pay system, companies find that customer service is better because employees are happier. In addition, having fairly compensated, motivated employees not only adds to the bottom line of the organization but also facilitates organizational growth and expansion. Motivated employees can also save the company money indirectly, by not taking sick days when the employee is not really sick, and companies with good pay packages find fewer disability claims as well. Websites such as Glassdoor or Indeed give you easy access to salary information of companies.

So far, the focus on HRM has been a strategic focus, and the same should be true for the development of compensation packages. Before the package is developed for employees, it’s key to understand the role compensation plays in the bottom line of the organization. The next few sections will detail the aspects of creating the right compensation packages for an organization, including legal considerations.

“7.2 Goals of a Compensation Package” from Human Resources Management – 3rd Edition by Debra Patterson is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.